Archive for the ‘Uncategorized’ Category

The Tax Cuts and Jobs Act — signed into law on December 22, 2017 — gave birth to a brand new provision: Section 199A, which permits owners of sole proprietorships, S corporations, or partnerships to deduct up to 20% of the income earned by the business. While the provision has the potential to bestow a tremendous benefit upon owners of these pass-through businesses, since its enactment, no one has been able to, well… figure out how the whole thing works. Quite truthfully, the statutory language of Section 199A created more questions than answers, with those queries ranging from the seemingly simple — what do we do about a fiscal year business that crosses over January 1, 2018? — to the much more complex — what exactly is a “specified service business” for which a deduction is generally prohibited?

I’ve spent more than my fair share of time writing and teaching about Section 199A since it’s enactment, and have grown weary of repeating the familiar refrain of WE DON’T KNOW YET each time someone asked a perfectly reasonable question. But that has been the reality.

If you were given the option of magically becoming 23 again — with the catch being that you had to be 23 in today’s world — would you do it? While having a hip that wasn’t slowly turning to dust would certainly be nice, I’d have to pass. The mere possibility that a combination of crippling student loan debt, rising housing prices, and diminishing starting salaries would force me to live with my parents for even one day beyond graduation makes my worsening limp seem not so bad.

Plus, I’m a tax guy. And I can’t imagine having to start my career in tax now. The entire Internal Revenue Code was rewritten as of January 1, 2018, which, in theory, kind of provides a “clean slate” to new professionals. No need to learn all that old stuff now that the new law is in town. But here’s the thing: all that old stuff is still really important, it’s just not there anymore. Making matters worse, the new law was hastily, and as we’re quickly discovering, poorly written, and as a result, trying to chase down answers in today’s Code is akin to being asked to solve the New York Times crossword puzzle, only after all the clues have been re-authored by sleep-deprived third graders.

The Tax Cuts and Jobs Act — signed into law on December 22, 2017 — gave birth to a brand new provision: Section 199A, which permits owners of sole proprietorships, S corporations, or partnerships to deduct up to 20% of the income earned by the business. The motivation for the new deduction is clear: to allow these business owners to keep pace with the significant corporate tax cut offered by the Act.

Income earned by a C corporation is subject to double taxation; first at the entity level, and then a second time at the shareholder level when the corporation distributes its income as a dividend. As part of the Act, the entity-level tax imposed on C corporations was reduced from a top rate of 35% to a flat rate of 21%. While the Act retained the top rate on dividend income of 20%, the dramatic decrease in the corporate-level tax lowered the top combined federal rate on income earned by a C corporation from 48% to 36.8%.

Contrary to C corporations, income earned by a sole proprietorship, S corporation or partnership is subject to only a single level of tax. There is generally no tax at the entity level; instead, the owner of the business reports his or her share of the income of the business directly on his or her tax return, and pays the corresponding tax at ordinary rates.

People are fat. No, no….not you. You’ve never looked better. I was talking about everyone else.

Well, not everyone else, but the statistics are pretty bleak. Two out of every three Americans are considered overweight or obese, ranking the U.S. among the fattest countries in the world.

Of course, rampant obesity doesn’t just make for an unpleasant trip to Walmart, it also kills. Cronut-related medical conditions resulted in 120,000 deaths last year, and that was just at one Columbus, Ohio diner. Ok, I made that last part up. But you get the idea. It’s a real problem.

For the past decade I’ve lived in Colorado, home to 14,000 foot summits, the 2016 Super Bowl champions, and lots and lots of legal weed. Now, we can debate whether legalized medicinal and recreational marijuana is healthy for an individual, profitable for a government, or morally palatable to a society, but what is not up for debate is this: the widespread availability of legal weed has given rise to a marked increase in amusing anecdotes.

Case in point: last week my friend and I went out for what was intended to be a moderate mountain bike ride. As tends to happen, however, two hours quickly turned to three, and then four, and before we knew it, we had been pedaling for nearly five hours. This was problematic for two reasons: first, we had only brought enough food for half that duration, and second, my buddy was in danger of missing the start of his son’s baseball game.

At long last, we returned to the trailhead, where my famished friend, before even changing out of his bib shorts or mounting his bike upon its rack, began tearing through his car for any morsel of food. He quickly grew frustrated, because on this day he had borrowed his wife’s car, so his usual supply of energy bars was nowhere to be found.

Finally, he opened the center console, and pulled out a sandwich bag filled with chocolate squares. One…two…three were popped into his mouth and swallowed, and as he went back for round two, I saw his face change. For it was at that moment that he realized that these were not ordinary chocolates, but rather his wife’s supply of “emergency” edibles in the event she felt overly stressed at work.

Needless to say, that was the most fascinating Little League game he ever sat through.

Less than five months ago, Republican leaders put the finishing touches on the Tax Cuts and Jobs Act, the most comprehensive overhaul of the tax law in 31 years. The legislation bestowed nearly $1.5 trillion in tax cuts upon corporations, small business owners, and workers over the next decade, and represents what is, to date, the signature victory of President Trump’s administration.

With mid-term elections just around the corner and rumblings of a potential “blue wave” growing louder, however, Republicans aren’t resting on their laurels. Just last week, Kevin Brady, Chairman of the House Ways and Means Committee, told reporters that the House is itching to have a go at “Tax Reform Phase 2,” with the aim of making the recently-enacted individual tax cuts permanent and the tax law, as a whole, more “family friendly.”

Wait…I’m an individual! I’m part of a family! This sounds wonderful!

Well, I’m not getting particularly excited about Brady’s promise, and neither should you, because unfortunately, it is nothing more than political posturing. Neither Brady nor anyone else in Congress, for that matter, really believes it will happen. Why not?

As part of the recently-enacted Tax Cuts and Jobs Act (TCJA), a new provision of the Internal Revenue Code was born: Section 199A, which provides a deduction to owners of sole proprietorships, partnerships and S corporations equal to 20% of the income earned by the business. Republican leaders who designed the TCJA hailed the provision as a field leveler; after all, the foundation of the tax bill was a reduction in the tax rate of so-called “C corporations” from 35% to 21%. And, the logic went, if owners of C corporations were going to enjoy that type of windfall, then something needed to be done for the Mom-and-Pop store down on Main Street as well.

Because, you see, in all likelihood, that sweet couple down at Al’s Hardware doesn’t run their business as a C corporation. Instead, Al’s is either a sole proprietorship, partnership, or S corporation. Why? Because if you operate a business as a C corporation, your business income is taxed twice: once at the corporate level when it is earned (now at the new, lower 21% rate), and again at the individual level when the corporation distributes the income to you as a dividend. That stings.

To the contrary, if you operate your business as a sole proprietorship, partnership, or S corporation (so-called “pass through businesses”), you only pay tax on the income of the business once; at the individual level at individual rates. And since Mom and Pop generally don’t want to pay tax twice, most small businesses avoid operating as a C corporation and opt instead to be taxed as a pass through business.

The items in this blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. A select group of Tax Professionals of WithumSmith+Brown write Double Taxation, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown.

Email Subscription

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Authors

Our tax specialists have a comprehensive understanding of international, federal, state and local tax regulations. We work with you to ensure tax reporting obligations are met in an accurate and timely manner, and to minimize or defer the payment of taxes, thereby adding value to your company. Through the use of technology, we stay up-to-the-minute on tax law changes, and know how they affect your business. Through our affiliation with HLB International, we can also assist you in developing cost-effective tax strategies anywhere in the world.